Why Are Energy Prices Are Rising? How To Manage Surging Costs (And Save)

One of the biggest buzzwords of the past year has been “inflation.” Every day’s news feed brings new stories about how the price of everything is going up. No matter what you’re buying—groceries, gas, shoes, shampoo—a dollar just doesn’t go as far as it used to.

The Federal Reserve, America’s central bank, aims to keep inflation at around 2%. That means every year, prices go up by just 2% overall. But in 2022, prices rose by many times that amount. In June 2022, the inflation rate peaked at over 9%, its highest level in more than 40 years. It’s since fallen to around 7%, but that’s still far too high for comfort.

And that’s only an average. Prices for food and, especially, energy have risen much more over the past year than prices in general. From November 2021 through November 2022, energy costs increased more than 13%. That’s got Americans feeling the pinch both at the gas pump and on their utility bills. 

Why are energy costs rising?

Part of the price increase is due to inflation. Prices are rising across the board, and energy is no exception.

At its core, inflation is all about the balance between supply and demand. Supply is the amount of any given good or service producers are willing to sell. Demand is the amount of that good or service consumers are willing to buy.

A classic economists’ summary of inflation is, “Too much money chasing too few goods and services.” When the supply of a product falls or the demand for it rises, there isn’t enough to go around. People competing for that scarce product must bid against each other to get it. As a result, its price rises. When this happens with most products and services across the board, inflation results.

However, that doesn’t explain why energy costs are rising faster than prices in general. This is due to specific changes in the world market for energy—particularly fossil fuels.

Supply and demand shifts

Energy prices are notoriously volatile (subject to change) because supply and demand are constantly shifting. Over the past year, however, there have been numerous factors driving supply down and demand up.

One reason is the ongoing easing of COVID-19 restrictions. As businesses reopen, more people are driving to work or traveling for vacation. And companies that shut down or scaled back their operations are once again shipping goods around the world. All that has increased the demand for fuel.

In addition, much of the U.S. was smacked with unusually cold temps and heavy snow in December. People and businesses needed more heating fuel to combat the cold.

However, oil and gas companies have not scaled up their production to meet this higher demand. For one thing, once an oil or gas rig is shut off, it takes time to get it working again. The rigs need maintenance, and the companies need to hire more workers. And drilling new wells is even more costly and time-consuming.

All these factors have made oil and gas companies reluctant to ramp up production. In fact, in December 2022, the Organization of Petroleum Exporting Countries (OPEC) cut production by 2 million barrels per day. That announcement drove world oil prices up by more than 20%.

It’s not clear whether OPEC and other fossil fuel producers will change their minds and boost production soon. Analysts at American Century predict that the supply will increase to meet demand, but slowly. For the short term, gas prices probably will not drop and may even rise a little.

Ukraine and Russia conflict 

One major factor affecting energy prices in 2022 was the ongoing war between Russia and Ukraine. Russia is a major petroleum producer, supplying about 10% of the world’s oil. But after Russia invaded Ukraine in February 2022, many countries refused to buy its supplies. That put a dent in the world’s supply.

Although the U.S. does not buy Russian oil, this change still affected energy prices here. The market for oil is global, with barrels moving freely all over the world. Thus, anything that reduces the supply anywhere raises prices everywhere.

The invasion also caused natural gas prices to spike in Europe, where many countries depend on Russian gas. Following the invasion, they rose from less than €90 (about $95) per megawatt-hour to nearly €350 ($370). (Benchmark prices for natural gas in Europe depend on the energy content of the gas, not volume.)

However, these changes were short-lived. By January 2023, natural gas prices in Europe had fallen back to pre-invasion levels. Crude oil prices have done the same. Energy prices are still above average, but the spike caused by the Ukraine war appears to be over.

Profiteering

According to some analysts, supply and demand aren’t the only factors behind the rise in prices. They say many companies, including energy companies, are raising their prices “under cover” of inflation.

Like everyone else, these companies are pricing their products higher to cover their own increased costs. But then they’re tacking on extra to pad their profit margins. According to the Economic Policy Institute, about 54% of recent price growth is due to higher corporate profits.

In the case of oil companies, these profits often go toward stock buybacks or higher dividends. The Groundwork Collaborative documents several examples of fossil fuel companies boasting about how much money they’re returning to investors. Meanwhile, consumers are paying the price.

In October 2022, President Biden proposed a windfall tax on energy companies. Companies earning massive profits would face a surtax if they didn’t start boosting production and bringing prices down. However, some analysts argue that such a tax could backfire. When the Carter administration put a windfall tax on oil company profits in 1980, oil production fell.

The silver lining of higher energy prices

High energy prices do have an upside (for the planet, at least). When energy costs more, people tend to use less of it—which means lower carbon emissions.

For instance, when gas prices rise, people drive less. If prices stay high for a long time, many of them switch to fuel-efficient or electric cars. Likewise, higher home heating costs encourage people to turn down the thermostat. Those who can afford it may decide to install a more energy-efficient heating system.

That means today’s higher energy prices are a win for the planet. In the short term, they help bring down emissions and slow the rate of global warming. And the longer they persist, the more of a boost they’ll give to energy efficiency measures. High prices for fossil fuels could also help steer more consumers and businesses toward renewable energy.

Unfortunately, this is only a small comfort to those feeling the pinch of higher bills today. 

How can I save on energy costs?

You are not powerless in the face of rising energy prices. There are several ways to bring down your costs. These fall into three main categories:

• Conservation. This means simply using less energy wherever you can. For example, you can save energy at home by skipping A/C on all but the hottest summer days. Likewise, you can save gasoline by driving less and walking more, though we realize that’s not always an option.
• Efficiency. Energy efficiency means doing the same amount of work with less energy. This could mean replacing old light bulbs with LEDs, improving your home’s insulation, or using ENERGY STAR appliances. Some states have programs that help households make the switch cheaply. Another example is replacing your car with one that gets better gas mileage.
• Paying less per unit. Finally, you can reduce the amount you pay for each unit of energy. In some cases, you can save on electricity by switching power suppliers. You can also produce your own electricity by installing solar panels or even a small wind turbine. These options have a high up-front cost but could save you money in the long run. Similarly, electric vehicles cost more than gas cars but cost much less for each mile you drive.

Consider community solar if it's available in your state

Hands down, the easiest way to save on energy is to take advantage of your state's community solar program, if one exists (Perch can help, just check your zip code). Unlike rooftop solar, this has no up-front costs and no installation hassles. You don’t even need to own your home. All you have to do is find and subscribe to a community solar farm near you.

Doing this entitles you to a share of the power produced by the solar farm. You’ll still pay a bill to your utility company, but you’ll get credits for the power from the solar farm. And along with the savings, you’ll be helping the environment and supporting the growth of clean energy. It’s a win-win-win.

Getting more people to support renewable power through programs like community solar could even help bring down energy prices overall. Nowadays, renewable energy is the cheapest way to produce electricity. Most of the factors driving up energy costs right now—reduced production, the Ukraine war—apply only to fossil fuels. Green energy, by contrast, continues to get cheaper every year. A 2022 Oxford University study found that replacing fossil fuels with renewables could save the world up to $12 trillion by 2050.

By enrolling in community solar today, you can be part of this green energy transition. It’s good for the planet, good for your wallet, and in the long term, good for consumers everywhere.